The Swedish economy is entering a slowdown phase after having peaked in the first half of 2018, according to the National Institute of Economic Research (KI).
However, the output gap will remain positive for the following two years, the government's forecast authority said.
“The labour market remains strong, although employment growth is set to slow. Wages in both the business sector and the economy as a whole are expected to pick up slightly” the institute wrote in its latest report.
One of the factors behind these changes is a decline in investment, especially in housing, which made a major contribution to demand growth in recent years.
Strong demand for new housing took housing investment to historically high levels at the beginning of 2018. However, investment has since decreased and this trend is expected to continue over the coming quarters and will be a key factor in slower growth of GDP in the first quarter of 2019.
KI now predicts GDP growth of just 1.3 percent in 2019, compared to an earlier forecast of 1.9 percent.
According to Trading Economics, GDP growth rate in Sweden averaged 0.56 percent from 1981 until 2018, reaching an all time high of 2.50 percent in the first quarter of 1984 and a record low of -3.70 percent in the fourth quarter of 2008.
Employment growth is expected to slow down in the beginning of 2019 due to the lower growth in output, KI predicted while unemployment will fluctuate around 6.5 per cent for the next couple of years.
The Riksbank, the national bank of Sweden, will begin to raise interest rates from early 2019 but only very gradually. Demand for Swedish export goods is set to grow steadily.
There are, however, looming uncertainties that could affect the forecast. “There is a risk of the UK leaving the EU in March 2019 without a deal. The tough tone of global trade policy also means that there is a growing risk of escalation of the trade conflict between the US and much of the rest of the world” KI warned.
Sweden is still without a government following the general election over three months ago. On 14 December, parliament voted against Social Democrat leader and caretaker Prime Minister Stefan Löfven becoming prime minister, a few weeks after Annie Lööf—leader of the Centre Party—abandoned her attempt to form a government.
“The central government budget for 2019 entails lower growth in government consumption and higher disposable income for most households. Fiscal policy will be neutral in 2019” KI said.